Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 70-51

1970-1 C.B. 192

IRS Headnote

Cash payments, other than health and welfare benefits, distributed annually by a labor union from its health and welfare fund to employees of contributing employers, are wages for employment tax purposes.

Full Text

Rev. Rul. 70-51

Advice has been requested whether certain cash payments made to employees by a labor union from a health and welfare fund, under the circumstances described below, are "wages" for purposes of the Federal Insurance Contributions Act, the Federal Unemployment Tax Act, and the Collection of Income Tax at Source on Wages (chapters 21, 23, and 24, respectively, subtitle C, Internal Revenue Code of 1954).

A health and welfare fund was established pursuant to a collective bargaining agreement entered into by an association of employers and an employees' union. The fund is administered by joint trustees composed of an equal number of representatives of the union and the employers. The employers are required to contribute weekly a sum equal to a certain percentage of the remuneration paid to each union member employed by the employers during the previous week.

The fund was established for the purpose of maintaining a health benefit program for the employees of the contributing employers. No right, title, or interest in the fund vests in the employers, the employers' association, the employees, or the employees' union, except as the trustees may determine the benefits to be paid to eligible employees.

The agreement establishing the fund provides only for accident, illness, or disability benefits to employees of the contributing employers who are in good standing in the employees' union. No provision is made for the distribution of any contributions paid into the fund that are in excess of the accident, illness, or disability benefits made to eligible employees. However, at the end of each year, the trustees determine what portion of the amount remaining in the fund should be held in reserve and pay the excess to the employees' union which, in turn, distributes these amounts in the form of cash payments to the employees of the contributing employers.

Section 3121 of the Code provides, in pertinent part, that the term "wages" means all remuneration for employment, with certain specified exclusions. The exclusion pertinent here is contained in section 3121(a)(2) of the Code which provides, in part, that the term "wages" shall not include the amount of any payment made to, or on behalf of, an employee under a plan or system established by an employer which makes provision for his employees generally or for a class or classes of his employees on account of sickness or accident disability or medical or hospitalization expenses in connection with sickness or accident disability. Section 3306(b)(2) of the Code contains a similar provision.

Under the circumstances in this case, the cash payments distributed annually by the union to employees are attributable to services performed by the employees for contributing employers during the preceding year. Although the cash payments are derived from the health and welfare fund, the cash payments are not made "on account of sickness or accident disability or medical or hospitalization expenses in connection with sickness or accident disability" and, therefore, are not excludable from "wages" under sections 3121(a)(2) and 3306(b)(2) of the Code. Accordingly, these cash payments are "wages" for purposes of the taxes imposed by the Code.

Since section 3401(a) of the Code contains no provision that would exclude from "wages" payments of the type here involved, the cash payments are subject to the withholding of income tax under section 3402 of the Code.

For purposes of income tax withholding, the union is the "employer" under section 3401(d) of the Code, which provides as follows:

(1) if the person for whom the individual performs or performed the services does not have control of the payment of the wages for such services, the term "employer" * * * means the person having control of the payment of such wages; * * *

Accordingly, the union is required to withhold and pay over income tax on the cash payments of the employees.

Section 31.3504-1 of the Employment Tax Regulations provides in the event wages of an employee or group of employees, employed by one or more employers, are paid by a fiduciary, agent, or other person, or if such fiduciary, agent, or other person has the control, receipt, custody or disposal of such wages, the District Director of Internal Revenue may, subject to such terms and conditions as he deems proper, authorize such fiduciary, agent, or other person to perform such acts as are required of the employer or employers in respect of such wages for purposes of the taxes imposed by the Federal Insurance Contributions Act.

Pursuant to section 31.3504-1 of the regulations, the union may apply to the District Director of Internal Revenue for authorization to perform such acts as are required of the employer or employers with respect to the cash payments from the fund for purposes of the taxes imposed by the Federal Insurance Contributions Act.

If authorization is granted to the union by the District Director pursuant to section 31.3504-1 of the regulations, the union may also report the cash payments for purposes of the Federal Unemployment Tax Act on its Form 940 for each calendar year in which the payments are made. See Revenue Procedure  68-21, C.B. 1968-1, 817 which relates to procedures for such reporting by a vacation trust fund.